Even in a low interest rate environment, you need a savings account
There are a lot of uncertainties about these days, and it has impacted the way we manage and invest our money.
The savings account has always been a proven watch, an easy and accessible vehicle to park your extra money for future needs. As COVID-19 continues to leave economic uncertainty in its wake, more and more people are turning to this old favorite account to stow their money away, but is it the right decision to make in a rate environment? low interest?
âInterest rates are at historically low levels and are expected to stay low for some time,â says Jay Abolofia, founder of Lyon Financial Planning outside Boston and certified financial planner. “In general, it’s good for borrowers and bad for savers.”
Savings account rates are very low
The pandemic is one of the main drivers of the drop in rates. In response to the economic fallout, the Federal Reserve cut interest rates to near zero in March 2020.
“While this has benefited the economy in many ways, it has also led many banks to cut interest rates for savers,” says Chris Abrams, founder of Abrams Insurance Solutions, an independent company of insurance and financial services.
Throughout 2020, savings returns have steadily declined, although they have largely stabilized. The best savings accounts currently pay around 0.6% APY, while the national average is only 0.06%.
So why would anyone consider a savings account in such a climate?
âEven with such low rates, a bank savings account can play a vital role in your overall cash management strategy, primarily because of its liquidity and deposit insurance,â says Abolofia.
Best Uses of a Savings Account, Even in a Low Interest Rate Environment
A savings account can be the vehicle you need in some unexpected life situations. However, there may be other accounts to consider for certain goals or time horizons.
âHaving a strong emergency fund will help you avoid a situation where you have to sell stocks that have fallen in value to pay for unforeseen expenses,â says Scott Schleicher, senior financial advisor at Personal Capital. âA common rule of thumb is to save between three and six months of non-discretionary living expenses in an emergency fund. This includes expenses like your mortgage or rent, utilities, insurance, groceries, and transportation.
Here are some other uses of a savings account.
When you need quick and easy access to cash
When it comes to withdrawing your money, savings accounts can make it easier for you compared to other products.
You can withdraw money from your savings account without paying a penalty, unlike a CD. This feature is especially important when dealing with unexpected emergencies. A savings account gives you convenient access to money for a new car tire or to pay for a similar emergency.
Even though the Federal Reserve removed a rule limiting savings account withdrawals and transfers to six per monthly statement cycle, your bank may still have that rule.
When you need a place for your short-term savings goals
The decision to use a savings account instead of another investment vehicle will likely depend on when you need that money, says Gilles Hudelot, director of education for the Mentoro Group, an investment company. financial well-being education.
âAnything that might be needed in one to two years would be in the bucket in the short term,â says Hudelot. âThis includes emergency funds and short-term savings goals like Christmas, vacation savings, or expenses that you know are coming soon. The risk of that money falling in an investment account does not outweigh any possible gains you might get.
When you need a place to keep your money safe
As long as you bank with an FDIC-insured bank or NCUSIF-insured credit union, you have more protection than with other investments. They are backed by the full faith and credit of the US government. The government will cover up to $ 250,000 for chess. Always make sure that you follow the limits and guidelines of the FDIC or NCUSIF.
Situations where a savings account does not make sense
Even with all of its benefits, a savings account is not for all scenarios.
When you need a place for your long-term savings goals
Consider strategies that will help you earn more money over time, such as investing it. Savings accounts are great for your short-term savings or emergency fund.
When you fail to meet the minimum account balance requirement
You will need to meet the minimum account balance requirements for it to be right for you.
âMost savings accounts today will have a minimum balance requirement, which means that if the account balance falls below the minimum amount, the account will incur fees or charges, which can deprive your account of his / her interest rate that he (he) earns, âsays Juan Carlos Cruz, founder of the Britewater Financial Group in Brooklyn, New York. âUsing a savings account for retirement and that low interest rate may not help keep up with inflation. “
When you are looking for big returns
A savings account will not be suitable for all situations.
âIf you are looking to save for a future financial goal, there are many better options for maximizing your money,â says Jacob Dayan, CEO and co-founder of Community Tax. Bonds, CDs, treasury bills and notes are best suited for risk avenues. For those who can take more risk, there are great options like index funds and blue chip stocks. These options are much better suited than a savings account where you can put your money into and earn higher returns.
At the end of the line
A savings account may not be ideal for all situations, such as saving for retirement. Savings accounts, however, can be a fantastic tool in your financial arsenal when you need short-term savings close and safe.
âSavings accounts are like parachutes,â says Roy Ferman, Founder and CEO of Seek Capital. âYour finances could be in a tailspin, whether it’s debt, loss of income, or a potentially deadly virus that has shut down the world. A savings account will be used to catch up with your fall.